Moody's: Cyprus most exposed to high household debt risks

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Among highly indebted European sovereigns, Cyprus (Ba2 stable) is most exposed to credit risks related to high household debt because it has a small economy, weak banking sector, and very elevated public and private debt levels, Moody's Investors Service said in a report today.

European countries that are more economically resilient are able to carry higher and rising household debt without it necessarily weighing on their sovereign credit profiles.

"Cyprus's sovereign credit profile is the most exposed of all the highly indebted European sovereigns to risks linked to high household debt," said Sarah Carlson, a Moody's Senior Vice President and co-author of the report. "Elsewhere in Europe, financial assets such as savings, insurance and pensions, as well as generous social safety nets, protect sovereigns against the risks stemming from high household debt."

For most European countries, the increase in private debt ratios peaked around 2008 before starting a downward trend, especially in post-crisis countries such as Ireland (A2 stable), Spain (Baa1 stable), Portugal (Baa3 stable) and Iceland (A3 positive).

This deleveraging was accompanied by an increase in public debt burden, with the exception of Iceland, where government debt declined substantially.

Cyprus is notable for not having seen a decline in household debt, where levels grew by 21% of income between 2007 and 2017 from an already high starting point.

The Mediterranean island also has a number of unique market characteristics that heighten the risks posed by high debt. Consumer loans account for almost half of outstanding household debt; close to 100% of Cypriot mortgages are floating rate and the country has an already weak shock-absorption capacity. In addition, Cyprus's economy is smaller and less diversified and its growth is much more volatile.